Many retired Americans struggled in 2022 as inflation surged. And to be fair, a lot of their younger, working counterparts struggled with higher living costs, as well.
Perhaps the only silver lining to come from that year of rampant inflation was a generous Social Security raise. In January, seniors on Social Security saw their benefits increase by 8.7%. That's the largest cost-of-living adjustment, or COLA, to come down the pike in decades.
But based on recent inflation data, next year's Social Security COLA is shaping up to be far more stingy. And it could leave many seniors with a serious loss of buying power.
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A much smaller raise
The fact that inflation has been cooling is a good thing. Now, consumers don't have to go into debt just to do basic things like putting food on the table or covering utility bills.
But lower levels of inflation could set the stage for a 2024 Social Security COLA that seniors end up unhappy with. In fact, the nonpartisan Senior Citizens League recently put out an estimate for next year's COLA, and the number is far from impressive -- just 3.1%.
Adding insult to injury is the fact that Social Security beneficiaries have lost 36% of their buying power since the year 2000, according to the Senior Citizens League. And the reason for that is the inability of Social Security COLAs to actually keep pace with rising living costs.
Between January 2000 and February 2023, Social Security COLAs raised benefits by 78%, averaging an annual increase of 3.4%. But the typical retiree's expenses rose by 141.4% during that time, averaging about 6.2 % annually over the same period.
Part of the problem is that Social Security COLAs are calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which, in April, was up 4.6% on an annual basis. The broader Consumer Price Index rose 4.9% annually last month.
But many of the costs covered by the CPI-W do not apply to seniors on Social Security. As such, Social Security recipients would be better served if COLAs were calculated using a senior-specific metric. But so far, that's not a proposal lawmakers have seemed to embrace.
Gear up for a less-impressive increase
All told, seniors on Social Security should not expect 2024's COLA to be anywhere close to the 8.7% raise they received at the start of this year. It's too soon to know exactly what next year's COLA will amount to, and that 3.1% figure is only an estimate. We'll need to see what the CPI-W looks like during the third quarter of the year to get a more spot-on COLA reading.
Either way, there's a good chance Social Security recipients are going to end up disappointed next year. And there's an equally good chance many will see their buying power decline even more. Seniors with extra money at their disposal now should make an effort to bank it in case their financial circumstances worsen in 2024.
